The biggest Ethereum update in recent years starts on August 4th on the mainnet

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On August 4th, the improvement proposal EIP-1559, which has been discussed for over a year, is due to be integrated on the Ethereum Mainet. It will be part of the bigger London update.

The implementation of the Ethereum Improvement Proposal (EIP) 1559 is considered the largest and most influential update of the blockchain in recent years. It aims to make the Ethereum network cheaper and faster by restructuring transaction fees. The scheme was in the process of the All-Core-Developers-Call on March 5th, 2021 decided and will be in the London update flow in.

On June 24th, 2021, EIP-1559 was successfully installed on the first test network called Ropsten. There were no problems. After that, the update gradually reached all other test networks until last week. The operators of these test networks should now have enough time for final checks. That’s why update coordinator had Tim Beiko the date originally planned for the end of July for the mainnet update was postponed at short notice. Now the London hard fork is to be integrated into the mainnet on August 4th.

EIP-1559 changes a fundamental concept of the Ethereum network, namely that of the so-called gas fees. So far, the transaction fees in the network have been set independently by the miners who carry out these transactions.

In future, there will be an algorithmically determined base fee instead. This is a basic fee that does not have to be auctioned for each transaction. We have explained the principle of gas fees in this article.

The calculated base fee should take into account the degree of network utilization and gradually increase or decrease. The block size in the network should also be changed dynamically in order to counteract blockages.

The base fee determined in this way is burned in the course of the transaction, i.e. destroyed by the protocol. Nobody benefits from these payments, which are always fixed to Ether due to the new regulation.

It is therefore understandable that large parts of the miner community could not make friends with the proposal because it would lose a very important financial incentive. The EIP-1559 still includes an incentive system, the so-called tip or inclusion fee.

In addition to the base fee, users will in future be able to offer an excess payment, the tip, in order to prioritize processing on the chain. Only these tips are given to the miners.

This means that they should by no means achieve their previous sales. In February 2021 alone, transaction fees alone were around 723 million US dollars.

Nevertheless, there are also miners who are positive about the proposal. They see the current problems of the Ethereum network quite soberly and acknowledge that they must contribute to the solution in order to keep the network future-proof.

Ethereum experts assume that if the Ethereum blockchain continues to be successful, the problem will shift away from the gas fees to the tips. According to this expectation, miners would simply give preference to those who are willing to pay the highest tips instead of – as before – the highest gas fees.

On the side of users and Ethereum application developers, i.e. the side that has to pay the transaction fees, EIP-1559 enjoys the greatest support. The world’s largest crypto administrator Grayscale Investments sees the proposal as an essential further development of the Ethereum network.

Mainly because of the concept of burning the transaction fees and the associated shortage of the ether inventory, Grayscale had predicted a strong upward trend for the ether price. It remains to be seen whether this forecast will prove to be correct despite the massive corrections made in recent weeks, but it is assumed by various experts.

This Week in Ethereum analyst Evan Van Ness predicts to his 38,900 Twitter followers that EIP-1559 will “very likely lead to a negative issue that will likely put significant upward pressure on ETH’s fiat price”.

Van Ness is convinced that the update will also help miners. They would be exempted from customer support if they were no longer responsible for billing the gas fees. All users have to do is pay the base fee. Compared to the previous approach, the process is highly abstracted.

Furthermore, EIP-1559 will create clear incentives for the introduction of layer 2 approaches or (better still) entire sidechains. Because so far, the miners have been able to pay without any effect on the gas fee. In the future, every action will result in half of the base fee being burned. Miners might not be interested in that.

Despite the resistance of the miners and mining pools, EIP-1559 was ultimately binding. Even with the decision, the core developers feared countermeasures by the opposing miners, which is why they did EIP-3238 have also been included in the upcoming update for inclusion.

This is the technical implementation of a difficulty bomb. This should gradually make mining on Ethereum more difficult. It is also an early step towards freezing the proof-of-work process in preparation for a move to proof-of-stake.

With the combination of the two proposals, the core developers also want to ensure that forking Ethereum is at least only possible if technical obstacles are overcome. In fact, immediately following the decision, miners threatened a so-called 51 percent attack. This is an attempt by a concerted unit to take control of the blockchain.

In return, Ethereum mastermind Vitalik Buterin threatened to move the version change to Ethereum 2.0, which would switch the consensus model from proof-of-work to proof-of-stake. That would deprive miners of the foundation. In the meantime, Buterin has calmed down again in this regard. Most recently, he had admitted that the version update could well be a few years in the future.

It seems that miners will eventually get used to the new regulation. A replacement for lost transactions (in addition to the tips) is already available anyway. With the so-called “Miner Extracted Value” (MEV), miners can use their influence in the compilation of blocks to place more profitable trades further up in the processing sequence.

MEV is already enjoying some popularity in the defibrillation area. Defi traders offer high fees to secure their place in the block. Ethereum mining pools will probably increasingly use MEV software in the future in order to develop this previously unused source of income.

By the way: The basic idea of ​​the EIP-1559 goes back to Vitalik Buterin, co-founder and inventor of Ethereum. He had a proposal in August 2018 (PDF), which concerns the fairer calculation of transaction fees on the blockchain that is more in line with the actual effort.

The article first appeared on March 7, 2021 and was last updated on July 13, 2021.

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